THE NEXUS BETWEEN GROSS NATIONAL SAVINGS AND ECONOMIC GROWTH IN ETHIOPIA

Abstract

Higher saving rates cause higher economic growth. Empirical works have shown that the direction of causality between gross domestic savings and economic growth may result in bidirectional causality between gross domestic savings and economic growth or no causal relationship between them. The objective of this study was to find the direction of causality between gross national savings and economic growth of Ethiopia using annual time series data from 1980-2018. To achieve this objective co-integrated VAR approach was employed. For this purpose the time series properties of gross national savings and real gross domestic product were ascertained using the ADF unit root test procedure while the long-run and short run relationships between the series was explored utilizing Johansen Co-integration Test procedure. The result of Johansen Co-integration Test indicated that the series were cointegrated and have a positive and significant long run relationship between the gross national savings and economic growth. The long run and short run relationship between gross national savings and economic growth showed that the effect of gross national saving rate on economic growth rate and the effect of economic growth rate on gross national saving rate are positive and significant. The causal relationship between gross national savings and real GDP was performed using the Vector Error correction (VECM) model and Pair wise Granger Causality Test. The results showed that there was bi-directional causal relationship between gross national savings and real GDP. Thus, policy makers are required to implement policy mixes aiming at increasing savings and growth in Ethiopia.